Playing The PowerShares Dynamic Retail Portfolio ETF For The Holiday Season (PMR)

Eric Dutram: As consumer spending is the key to the viability of any economy, the health of the retail industry is an important economic indicator. According to the National Retail Federation, retail spending accounts for about $2.5 trillion of annual U.S. GDP and acts as a barometer for measuring the health of the nation’s economy.

The Conference Board’s reading of the Consumer Confidence Index — a yardstick of U.S. consumer health — continues to post solid figures, while the unemployment rate is also trending lower. Thanks to these factors, many are starting to feel more confident about their economic condition and are considering spending once more.

With improving unemployment rates, increasing home prices and rising consumer confidence, this holiday season is expected to be good for retailers. The National Retail Federation expects holiday sales this year to rise 4.1% to $586.1 billion, above the 10-year average holiday sales increase of 3.5%, but still lower than the 5.6% growth recorded in the 2011 holiday season.

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Optimism for the holiday season remains intact as retail promotions are expected to hit the right chord with holiday shoppers. Retailers have gone to great lengths to make the most of the busiest shopping time of the year, offering lucrative discounts to flexibility of shopping through smartphones and tablets, to free shipping and 24-hour shopping.

The latest trend this holiday season is the policy of matching prices being offered by online retail giants in order to keep up with the competition. Further, to better serve the shoppers, the retailers are ramping up their hiring plans as well, suggesting a pretty optimistic tone overall.

Investors willing to invest in this space of the market, and take advantage of the positive impact of the upcoming holiday season on retailers, should consider looking to top Ranked ETFs in the space. One way of doing this is via the Zacks ETF Rank which helps to narrow down the broad ETF field to a more manageable level.

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium, or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk.

For investors seeking to apply this methodology to their portfolio in the Retail sector, we have taken a closer look at Zacks Ranked 2 or Buy’ ETF, the PowerShares Dynamic Retail Portfolio (NYSEARCA:PMR) below:

PowerShares Dynamic Retail Portfolio (NYSEARCA:PMR)

PMR is an exchange trading fund that tracks the Retail Intellidex. This equity index is intended to offer capital appreciation through appraisal of companies on the basis of a range of investment criteria which include: fundamental growth, stock valuation, investment timeliness, and risk factors.

Investors should note that to obtain exposure to this ETF they need to pay 63 basis points annually, which makes it the second most expensive fund in the space. PMR does maintain a significant exposure to small cap and large cap companies, and holds a small basket of just 30 stocks in total. The fund invests in an asset base of $49.1 million in its small portfolio of retail stocks and trades with a small volume level so total costs could be a bit higher (also see Play a Consumer Recovery with These Discretionary ETFs).

The fund is also, to some extent, concentrated more on its top holdings, with nearly 45% of the fund going to the top ten. Kroger holds the first position in the list, closely followed by CVS Caremark and Limited Brands. Retail giant Wal-Mart holds the seventh position in the fund with an asset investment of 4.72%.

Still, the fund delivered a return of 20% over a period of one year, and could push higher if the economy continues to improve. For this reason, we give this fund a Zacks ETF Rank of 2 or ‘Buy’ with a Medium Risk Rating.

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.